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4 April, 22:45

The economy is in a recession. The government enacts a policy to increase spending by $2 billion. The MPS is 0.2. What would be the full increase in real GDP from the change in government spending, assuming that the aggregate supply curve is horizontal across the range of GDP being considered? A. $6 billion

B. $8 billion

C. $10 billion

D. $16 billion

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Answers (1)
  1. 5 April, 02:39
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    C. $10 billion

    Explanation:

    The computation of the full increase in real GDP is presented below:

    Given that

    Increase in government spending = $2 billion

    MPS = 0/2

    We know that

    Multiplier = One : MPS

    = 1 : 0.2

    = 5

    So, the full increase in real GDP would be

    = Multiplier * increase government spending

    = 5 * $2 billion

    = $10 billion
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